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What Is Financial Literacy?

Financial literacy is an understanding of money and financial products, applied to finance-related decisions in daily life.
Balancing a checkbook is one skill of financial literacy.
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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 04 September 2014
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Financial literacy is an understanding of money and financial products that people can apply to financial choices in order to make informed decisions about how to handle their finances. Many individual nations have recognized the importance of financial literacy and created task forces to study their populations with the goal of offering education and outreach. A common place to see classes is in high schools, where students may be offered the opportunity to take some brief courses to prepare them for managing their finances after graduation.

Financial literacy involves a number of different areas of understanding. Learning about money and how it works is an important aspect, as is understanding products like credit, loans, and insurance. The ability to understand and work with interest and exchange rates is also important, with interest being of particular concern since many consumers take advantage of the credit market.

Other topics of interest include understanding risks, learning how to evaluate potential investments, and identifying scams or dubious financial practices. Balancing checkbooks and accounts and being able to read account statements is also an important skill. Financial planning is another key aspect of financial literacy, as it is important for people to recognize how financial planning can help them prepare for life events.

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Primers and textbooks that cover the basics of financial literacy are available from many publishers. These texts can be used in organized classes and they may also be read independently by people who are working to improve their financial abilities. Some governments also host educational websites that people can use to take course modules, study with practice exercises, and learn more about how finances work, both on a personal and national level.

Simulation of financial events is often used in classroom settings to help people internalize important concepts in financial literacy. People are presented with hypothetical situations and asked to demonstrate how they would decide and why, as for example when people are asked whether they would take a lump sump payment or a series of smaller payments with interest. If people cannot correctly break down and calculate the problem, they may make a hypothetical choice that would be against their interests if it was made in the real world.

Levels of financial literacy are highly variable. Some surveys suggest that people feel more literate with financial matters than they really are, claiming to understand financial concepts but not demonstrating that understanding on examinations and tests. Identifying areas where a population may be falling short on their understanding of financial topics is an important aspect of developing fiscal policy.

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mutsy
Post 4

Icecream17 - I agree with a lot of what he says. He feels that our choices of professions might be different if we had no debt suggesting that many people are tied to their current line of work because of their bills but if they were faced with difference circumstances they might choose to do something else.

He also believes that when all debt is eliminated a person should contribute to a charities or various charities in order to give back to the community.

I like Dave Ramsey. I hear his radio program on Sirius Satellite radio in the afternoon and he gives consistent no nonsense advice that people can really understand. The financial literacy education that he offers his listeners and readers really helps them take a more proactive role in their lifestyle choices and remarkably once many of his listeners get out of debt they learn to live on less and develop newfound confidence in their financial status.

It is really liberating when you get out of debt. However, he is totally against credit cards so if you are looking to buy any of his books from his website you will have to pay by check.

He does practice what he preaches and was also bankrupt once so he understands what overwhelming debt feels like.

icecream17
Post 3

Cupcake15 - I agree with you. I know that Dave Ramsey offers a course called, “Foundation for Personal Finance: a High School Curriculum” that teaches teens how to manage their money and even offers elementary investment advice.

He says that about 90% of high school students want to do more with their money but don’t know how. He also offers a financial literacy program for adults called, “Financial Peace University.”

In it he outlines how to get out of debt and eventually be able to live the lifestyle that you would like. He says that the keys to building wealth revolve around what he calls the “Baby steps” which are small financial milestones that are necessary for acquiring wealth.

He advises his readers to have at least $1,000 in the bank and begin tackling the smallest consumer debts first until eventually everything is eliminated except the house. At that point, he suggests to have an emergency fund with up to six months of living expenses set aside and then progress to fund the retirement accounts up to the maximum allowance.

He says that after that point, a couple with children could fund their child’s college fund and eventually pay down their mortgage. He believes that living a life that is debt free allows you the freedoms to do what we would like to do.

cupcake15
Post 2

Anon151608 - I think that youth financial literacy is essential. Financial literacy for kids should begin in elementary school and continue to provide a high school level curriculum on personal finance much like a math program does.

Too many college students are reporting enormous debts due to credit card spending and student loans. Even before they get their first job they are already overwhelmed.

Often these college students use their credit cards to offset their college expenses but end up spending even more than they need.

There have been studies that prove that people spend more money when they use a credit card then when they are using cash.

The reason is simple. With cash you are immediately accountable, but with credit cards you are not. This is why we need to teach students when they are very young to make wise financial decisions so that they will not be overburdened later in life.

anon151608
Post 1

thank you so much. It helped me understand finance better.

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